The recent incidents within the crypto space have increased the calls for more transparency from crypto companies, especially centralized exchanges. Soon after the tragic FTX crash, businesses started addressing their customers’ concerns by promising them Proof of Reserves. Proof of Reserves is simply a report that would show that a business, like a crypto exchange, is actually holding the users’ crypto assets on their behalf and is not using the funds for any other business purposes.
As the drama continued, some started talking about the benefits of self-custody and encouraged investors and traders to store their cryptocurrencies in their own cold wallets while others pitched the advantages of secured custodians.
Something that seems missing in all these technical-heavy talks, though, is that they are meant for an audience that has faced troubles even understanding the basic technology in the first place.
Cryptocurrencies work with private keys, a long string of numbers and letters that proves we are the real owner of the crypto we’re holding. But how are we holding a crypto token really?
We are saving the private keys of the crypto assets we own. Like any other digital item, we have different ways of storing them and the technical terms we mentioned earlier, like self-custody, custodians, or cold wallets, actually, refer to these various ways.
Self-custody or Custodians: It’s Up to Customers to Choose
Self-custody simply means that you’re storing and keeping your cryptocurrencies by yourself. For this, you would need a cold wallet which is essentially a piece of hardware that does not connect to the internet to reduce the risks of online hacks and thefts.
The hard part about self-custody is the technical details that you need to learn. As you become your own bank, there’s no backup plan to retrieve your funds if you somehow lose access to your wallet, either misplace it somewhere or forget the passwords. There’s no “Forgot the Password” option or support team to go to. You will always be the only one responsible.
This responsibility is the main reason why many users prefer to use centralized crypto exchanges. Centralized crypto exchanges keep users’ funds in their own storage (wallets) and in exchange, offer them a user-friendly and easy-to-use platform. With these exchanges, users can simply buy, sell, and trade cryptocurrencies without the need to deal with the technical side of cryptocurrencies.
Now, the main question is how these exchanges take care of the users’ crypto assets.
Some crypto exchanges use their own storage. They have their own cold and hot wallets and they should take the required measures to keep these wallets secure and safe at all times. Unlike cold storage, a hot wallet is connected to the internet as the exchange needs some of the funds accessible online to be able to offer instant trading services to its users. This extra comfort increases the chance of online threats.
Digital custodians are a safer option that can help exchanges to offer convenience, speed, and security at the same time. A reliable custodian would be compliant, following the latest security standards while offering instant transaction monitoring options to make it easier for exchanges to track fraudulent trades and transfers.
The other important factor is their insurance policy and how they would compensate companies in case of security incidents. This measure shows, to some extent, how much confidence a service provider has in its own platform and services.
At the end of the day, it’s up to users to choose where they want to store their cryptocurrencies. They can use the self-custody option if they have the required technical knowledge or simply go with a crypto exchange that offers the most secure custody solution available.
A Quick Word with Our Customers
As the CTO of DIFX, I believe it’s essential to explain how we are ensuring the security of our platform.
We started DIFX with a partnership with Fireblocks, a well-known digital asset custodian that offers institutional custody solutions to banks, exchanges, and hedge funds. Alongside holding multiple security certificates such as CCSS Level 3 and SOC 2, Fireblocks offers a very strong insurance policy that covers assets in storage and transition alike. They use MPC cryptography technique with hardware isolation to offer one of the most secure digital storage solutions available in the market.
We also have an ongoing bug bounty program with HackenProof which puts our platform on a 24/7 security test.
The recent incidents were tragic for the whole crypto market but they also present us with a good opportunity to learn and improve ourselves to be able to provide the best possible services to our customers.
At DIFX, we will always put the security of your funds first.
